Implied minority discounts: not just a Delaware problem

A recent case in federal district court demonstrates the confusion that still clouds the concept of an implied minority discount. In Kaplan v. First Hartford Corp., 2009 WL 737681 (D. Me. 2009), a statutory fair value appraisal action, the company’s expert argued strongly in support of an implied minority discount (IMD):

I understand that the statutory definition of fair value for appraisal purposes adopted by [state law] does not allow for discounts for lack of marketability or for a minority stake. However, in my opinion it is necessary to apply a minority discount to [the subject company’s] NAV in order to make the NAV comparable to the values based on the other two methods—market value and investment value. … In other words, [the company’s] NAV per share represents the amount that someone may be willing to pay to acquire a hundred percent stake in the [company], while the market value and investment value represent the amount an investor may be willing to pay to acquire a minority stake in [the company].

Nancy Fannon, an expert on the same side of the case, disagreed. “My report and testimony discussed why the public market was not stated at a discount and why a control premium would not apply,” she tells BV Valuation Law. Ultimately, the court found the public price had a built-in minority discount and adjusted the company’s market value (from Pink Sheets data) upward for the IMD. “I think it’s easy to get anchored to the notion that an IMD exists” says Fannon. “Part of the problem is we have so much precedent that tells us so. But I don’t think it’s often, or perhaps even usually, the case.”

Do you still adjust public company data for an implicit discount? Then you’ll want to join Gil Matthews and Professor Michael Wachter this Friday, March 19, 2010, for the BVR teleconference, “Implied Minority Discounts in Statutory Fair Value: The Doctrine that Won’t Die.” Learn the strange history of the IMD and how to reconcile the divergence between judicial precedent and current, best BV practice. Two CPE credits available: Register here.